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Regulation has “not fixed” the payday loan market

9 November, 2016

Nearly two years on from tough regulations implemented by the Financial Conduct Authority, the payday loan market continues to show signs of irresponsible lending and poor treatment of people in financial difficulty, according to a new report from StepChange Debt Charity.

The proportion of people coming to the charity with payday loan debts has fallen from its peak of 23% in 2013 to 16% this year, but the report identifies persistent and new issues that show regulation and political pressure have by no means fixed the market.

The report also questions whether regulation is falling behind changes in the market, with lenders shifting from the traditional 30-day payday loan to more costly, longer term instalment loans.

The charity is calling on the FCA to finish the job of tackling these problems during the upcoming review of payday loans, and is calling on the Government to help by looking at new forms of affordable credit for those that need it the most.

Irresponsible lending and multiple payday loan debts

Regulations introduced in 2015 were designed to tighten lending criteria, but the charity’s evidence shows that irresponsible lending still occurs, people still build up multiple loans and affordability assessments undertaken by lenders are still not always effective. In the first six months of 2016, StepChange Debt Charity helped 28,000 people with payday loan debts and over a third (37%) of them had three or more such debts. The average amount owed was still £1,380, just £17 lower than before the regulations came into force.

To investigate further, StepChange Debt Charity surveyed over 500 clients who had taken out payday loans after the regulations and found that 26% did not think their lender took reasonable steps to check they were able to afford to repay. Despite the regulations being written to directly tackle the fact that people did not understand the total cost of repaying, the survey also showed that 19% had only a rough idea of how much they’d have to repay, while 6% did not know.

Poor treatment of those in financial difficulty

In 2014, the FCA reviewed how payday lenders treated people in financial difficulty and found evidence of “unacceptable practice”1. StepChange Debt Charity’s new evidence suggests that some of these issues are still commonplace, with the survey revealing that after telling their lender they were struggling to repay:

21% continue to have charges and interest added to their debt

Less than a third (29%) were given an affordable repayment plan

11% were threatened with legal action

4% were offered another loan

The payday loan market is changing

While the number of people seeking its advice with payday loan debts has fallen since the introduction of tougher regulations, StepChange Debt Charity is concerned by the growth of instalment loans. Whereas payday loans are usually lent over a period of up to 30 days, instalment loans are lent over periods of two months to a year and also carry very high rates of interest.

Although these loans are also subject to the price cap, borrowers may end up paying more than they would for a payday loan as interest rates are applied over a longer period. The charity fears that people who fall into difficulty could struggle with large repayments over a longer period.

The charity’s research shows that newer firms in the market offering medium term, instalment loans now make up a significant proportion of the payday loans its clients are struggling with.

FCA must take further action

As part of the upcoming review of the payday loan price cap, StepChange Debt Charity is calling on the FCA to examine a number of issues. These include the impact of the shift to instalment loans, whether the current cap is suitable for these new products and the need for stronger rules to address irresponsible lending. Originally, the regulations aimed to reduce the harm caused by 30 day loans, but as instalment loans are becoming more common, the FCA now needs to examine whether or not the cap is right for the market we see today.

The charity is also calling on the Government to look at new ways to provide greater access to more affordable credit. It has highlighted international examples such as Australia’s ‘Good Shepherd’, which provides low or no interest loans to financially excluded households, as schemes that the UK could look to emulate.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said:

“Regulation can make a significant difference to broken markets and FCA action over the last few years has gone some way to fixing the worst excesses of payday lending, but there is clearly still work to be done.

“Poor lending practices and the poor treatment of people in financial difficulty have serious consequences. They trap people in a cycle of repeated borrowing and as their balances continue to mount, so does the stress and anxiety that comes with severe problem debt.

“It is essential that the FCA review of the payday lending cap is broad enough to fix areas of consumer detriment and poor lending practices. There is also a clear and immediate need for the Government to examine more affordable forms of borrowing for financially vulnerable people, who are often left with nowhere else to turn in their hour of need.”

StepChange Debt Charity conducted a survey among its clients to find out their experiences of using payday loans. The sample was StepChange Debt Charity clients who came to the charity for advice between 2015-2016 and had all applied for HCSTC after January 2015. We had 530 respondents between 1 August and 14 August 2016.

Payday loans are relatively small sums lent over a short period of time at a high interest rate. They were previously lent for around 30 days but can now be longer term instalment loans of two months to a year. This research covers both these loan types using the FCA definition of ‘high-cost short-term credit’: any regulated credit agreement that has an APR equal to or exceeding 100% and is provided for a maximum of 12 months and is not a doorstep loan, bill of sale loan or overdraft.

Figures from StepChange Debt Charity clients from before the regulations and in 2016:

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*This is the average rating of our service based on the StepChange reviews on Feefo by DMP and DRO clients three months into their solution.